What Do China & Russia Know About Gold & Should You Invest?

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Fifty talents of gold ransomed Julius Caesar from pirates, each 71-pound Roman talent containing 1038.47 troy ounces of gold and totaling nearly $69 million in today’s currency.
Worthy of kings, gold has continued to be a significant source of investment for some countries – and individuals – even though the modern economy uses fiat currency. In a world that no longer operates on a gold standard, how precious is the precious metal?

Gold Holdings Increasing

While the United States remains the largest official holder of gold, with over 8,000 metric tons, China, Russia and a handful of others have demonstrated healthy appetites for the precious metal. In fact, China’s declared acquisitions have ranked it fifth in the world while Russia’s have placed it sixth – four places ahead of India:

– In 2000, China had a mere 395 metric tons, or tonnes, of gold, jumping to 600 in 2002, to 1,054.1 in 2009 and to 1,658.4 in 2015’s third quarter. As of December 2015, according to the World Gold Council, China had 1,708.5 tonnes, more than quadrupling its holdings in a decade, with additional reserves suspected.

– Similarly, Russia’s gold holdings averaged below 400 tonnes until 2006’s last quarter, when the federation began adding an average 28.5 tonnes per quarter; acquisitions ranged from a modest 5.5 tonnes in 2014 to an impressive 77.2 in 2015’s third quarter. World Gold Council figures for December 2015 credit the Bear with 1,370.6 tonnes – at least a 70-percent increase over a decade.

While most developed countries’ holdings remain static, some developing nations have been steadily adding since 2011:

– Kazakhstan went from 70.4 tonnes to 213.5, adding 7.8 in 2015’s third quarter.
– Jordan went from 12.8 tonnes to 41.1, adding 7.5 in 2015’s third quarter.
– The United Arab Emirates, long featuring zeros, added 5 tonnes in 2015.
– Turkey went from 116.1 tonnes to 504.5 by 2015’s third quarter.

Gold’s Economic and Political Impact

So, what is gold’s real value? Aside from the fact that spot prices are hovering around the $1,100 mark, gold carries with it a perceived promise of stability against economic volatility. For instance, despite a steadily contracting manufacturing sector and a repeatedly devalued yuan, China is the world’s largest producer of gold, supplying a full third of global demand, with expected growth of 20 percent by 2017’s end. Meanwhile, China has won International Monetary Fund special drawing rights (SDR) bona fides for its yuan, or renminbi. As of October 2016, China’s currency will join the euro, U.S. dollar, British pound and Japanese yen as approved global currency.

Similarly, Russia steadily continues to buy gold to shore up a ruble in free fall. Even now, speculation over whether Prime Minister Putin will adopt a gold standard for Russia is rampant. Meanwhile, Russia is the world’s fourth-largest producer of gold, exporting well over $3 billion of it in 2014 alone.

A gold producer itself, Kazakhstan has been acquiring gold for reasons akin to Russia’s – the need to maintain its own currency. Likewise, Turkey has become the largest gold producer in Europe, yielding up 31 tonnes of gold in 2014 and seven new mines over the last 15 years. Intent on holding its lira and economy steady, it used gold to bridge its trade deficit in 2015’s second quarter but was already purchasing more by its third quarter.

Just as many sovereign nation states equate gold to economic stability, so, too, do many private investors. The undiluted commodity offers a safe hedge against inflation. If gold demand increases, major exporters win not only higher prices but a strengthened currency, international status and influence. If inflation devalues currency, investors have the security of gold. However, gold can also become a double-edged blade, falsely valuing or devaluing a currency used to pay for it for both countries and individuals.

Personal Investment

Typically, gold prices correlate to economic state. As economies thrive, the need for gold diminishes, reducing its cost. As economies suffer, however, gold becomes a beacon of preservation of assets, with escalating demand increasing value.

Currently, prices are a far cry from both the spikes of 2011’s third quarter, when gold hit $1,921, and the modest $300 bargains of the early 2000s. With a gold spot price around $1,100 and a strong dollar, the precious metal offers investments in a number of ways:

– Physical Gold. Investors can choose from among gold bars; bullion coins, such as American Buffaloes or Eagles, Krugerrands, Vienna Philharmonics or Canadian Maple Leafs; or jewelry or other gold items.

We recommend BullionVault because they allow investors to purchase gold online at low prices. Bars can then be stored in professional-market vaults in Zurich, London, New York, Toronto or Singapore. Because of their size (BullionVault manage over $2bn worth of gold for 55,000 clients worldwide), you benefit from low storage costs which always include insurance.

– Exchange-Traded Products. You can choose from exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs). All of these correlate to the price of gold and are traded on the major stock exchanges. With these, investors don’t actually own any gold at all and are paid in equivalent-value currency. With ETFs, the issuer – GLD, IAU, AGOL, SGOL or OUNZ, for example – may actually hold the specific physical asset you’re investing in. CEFs are similar but have higher fees and less transparency due to more active management. An ETN is an unsecured debt note issued by the underwriter.

– Mining Investment Funds. Rather than investing in the gold itself, you can invest in mining companies. Environmental rules are changing the mining industry, however, making extraction and refinement in some countries exorbitantly expensive or risky. Nevertheless, you can invest in numerous aspects of the gold industry, including exploration.

– Gold Futures. For individuals interested in high-risk-high-return speculation, futures contracts specify a price for a delivery of gold on a set date. Long and short positions – buying and selling – can offer leverage on the exchange with less investment capital needed than purchasing physical gold outright. However, trading futures relies on perfect timing, and fees can exceed returns.

The commodity of gold is riven with sentiment and financial insecurity. Experienced professionals recommend diversifying portfolios with gold or precious metals but limiting allocations to 5-10 percent.

Rewards can be amazing – like 2010’s 27-percent increase – or heartbreaking – like 2013’s 28-percent price drop followed by 2 years of sinking values. So far, 2016 shows a respectable increase in gold prices, but when interest rates rise, gold values tend to drop. In contrast, political or economic instability raises gold’s price. Charts detailing gold peaks and lows for investment choices confirm only that nothing remains the same.

Whether you’re a gold bug, a high-risk trader or a careful investor, only you can determine how much influence gold-acquiring nations will have on your investment strategies, and only time will reveal the results.

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Scott is a contributor to Seeking Alpha, DividendLab.com, WeInvest.net and many other financial sites.